Cost of super to cause a shake-up

A mammoth submission to
David Murray
’s financial system inquiry by the Reserve Bank of Australia has the potential to shake Australians out of their complacency about the heavy cost of the country’s compulsory saving system.

The submission publishes a graph showing Australia as the third most expensive superannuation system out of 17 countries from the Organisation for Economic Co-operation and Development.

The RBA highlights the various reasons why Australia’s administration and investment management fees are high relative to other countries including the lack of engagement by fund members. It notes that complexity in comparing fees across funds plays a role in disengaging members. This is something Murray should analyse in depth. It is notable the submission from the Financial Services Council did not mention fees.

It will be interesting to see if the Australian Prudential Regulation Authority addresses this issue given its experience. When APRA first highlighted the problem of the high administration and investment management costs eating into superannuation savings, there was a backlash from bank-owned wealth management companies which handle about a third of super savings. Since then, the government has launched the MySuper system for default funds. These funds’ costs are about a third of the levels that prevailed previously.

Industry super funds have promoted their low costs and the long-term benefits of investing in not-for-profit funds. However, Greg Tanzer, a commissioner at the Australian Securities and Investment Commission told a Senate Committee hearing earlier this year the regulator was investigating industry super advertising comparing the performance of retail and industry funds.

Another prime concern the RBA has about super is the liquidity risk posed by the ageing population. Older members will be withdrawing funds and this could lead to a mismatch of assets and liabilities.

The RBA says the inquiry could focus on whether superannuation funds are appropriately balancing the liquidity of their liabilities and their investment profiles. It does not support suggestions that investment allocations could be imposed to meet funding targets for certain sectors and or asset classes. Superannuation assets should be managed in the best interests of their members.

Since 1997, superannuation assets as a per cent to gross domestic product have more than doubled to be over 100 per cent.

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Company Profile

The intitial euphoria over the possibility of
BHP Billiton
demerging about $20 billion in non-core assets has quickly given way to hard-nosed analysis of the difficulties in making it happen.

The most prominent issue that will have to be dealt with by Goldman Sachs, the company’s advisers, revolves around the dual listed company (DLC) structure with stock exchange listings in Australia and the United Kingdom.

Before discussing those problems, it is worth reminding BHP Billiton shareholders of the benefits of a demerger.

As Glynn Lawcock at UBS has pointed out in a note to clients, the demerger option is the least risky way to dispose of assets compared to the alternatives such as a trade sale, initial public offering or carve out.

He says demergers are attractive because of the renewed management focus on the businesses involved in the spin-off, increased investor interest in the stand-alone entity, the release of cash to BHP Billiton as it pushes debt into the demerged business and the possibility of a takeover of that business.

Demergers involve an in-specie distribution of shares to shareholders. BHP did this in October 2000 to demerge OneSteel and in 2002 to demerge BlueScope.

However, when the steel businesses were spun off, both were cash generating businesses that were each viable in their own right. Both are still standing today, having survived restructuring exercises caused by structural changes and Australia’s high cost of doing business.

The assets on the demerger block have patchy earnings outlooks. three of the four businesses on the block lost money in 2013 according to Lawcock’s numbers. He forecasts aggregate losses of $125 million in 2014 and positive EBIT of $391 million in 2015.

However, the market will value the businesses on earnings before interest, tax, depreciation and amortisation which Lawcock tips at $1.08 billion in 2015.

Passing selected poor performing businesses to shareholders and leaving them to sort out the mess could be a challenge for BHP Billiton.

Shareholders will need a convincing story when they vote on the transaction. The selling point might be the counter factual which is that BHP Billiton’s earnings and return on invested capital will rise.

Most of the non-core businesses being considered for demerger are in the UK listed or plc structure and that could cause problems. The DLC structure requires equitable treatment of shareholders in Australia and the UK. When the steel assets were spun off after the BHP merger with Billiton, shareholders in Australia received shares and shareholders in the UK received a bonus issue of plc shares. If the UK listed businessese are demerged a reverse set up to the steel spin off could be used. But that will mean heavy dilution of the plc holders. One wonders how Evy Hambro at BlackRock, the company’s biggest shareholder will feel about that?

Assuming all of these issue are resolved and the demerger is successful, shareholders in the UK will still own 40 per cent of the group and be entitled to more than $2.5 billion in dividends each year.

With only a few UK listed assets remaining in the group it will be very costly to fund this liability from Australia.

That suggests that the demerger might require the collapse of the DLC structure and a complete separation of the BHP Billiton Ltd and BHP Billiton Plc entities.

Soon after
Westpac Banking Corp
chief executive
Gail Kelly
announced the largest private education scholarship in Australia’s history,she talked to Chanticleer about her future at the country’s oldest bank.

Her replies were quite revealing and should help to temper some of the speculation that continually swirls around the bank about succession planning.

“I am loving what I am doing, I am having a lot of fun doing what I am doing and that’s the main thing. I am feeling very committed to the organisation and its agenda and its journey and loving it.

“There is no immediate plan and I am not going to add to that speculation really. It’s just a privilege to be in this role to be honest knowing at some point I will hand the baton on to the right next person and that person will take it forward and build a future again.

“Again, that’s what succesful organisations should do is have strong leadership but different phases and then pass the baton on to the next strong leader for the next phase."

But the critical quote came when she was asked if she agreed it made no sense for her to take on the chairmanship of the Australian Bankers’ Association for two years in December 2013 and then walk away from it before the two years was up.

She replied: “Exactly."

That does not preclude Kelly from ­stepping down as CEO of Westpac earlier than the end of next year but it does highlight her thinking about her obligations to the industry.

Whenever she leaves, Kelly will leave an impressive legacy. Measure her up against the other CEOs in the room at Wednesday’s announcement of the creation of the Westpac Bicentennial Foundation and she stands out. The other former CEOs were Bob White, Frank Conroy and David Morgan.

The $100 million being put into the Bicentennial Foundation will be a charge against the profit and loss in the second half of this financial year.

This creative and forward thinking idea will assist a range of young Australians to lift their edcational standards and engage more deeply with our Asian neighbours.